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The key to building wealth? Start early, author says

The best way for young investors to build wealth for retirement is to ignore their instincts, says a book targeted at 20- and 30-somethings.

The best way for young investors to build wealth for retirement is to ignore their instincts, says a book targeted at 20- and 30-somethings.
(Dreamstime)

By Carolyn BigdaChicago Tribune

Thu., April 24, 2014

What’s the best way for young investors to build wealth for retirement? Ignore your instincts, says a new e-book targeted at 20- and 30-somethings.

“If You Can: How Millennials Can Get Rich Slowly,” was written by William Bernstein, a retired neurologist, who has written several books about investing.

Bernstein says there are things young people can do to secure their financial future. In fact, the steps are relatively simple—as long as you stick with them for the many decades you’ll be planning for retirement.

“It’s like saying, ‘If you want to lose weight, you should exercise more and eat less.’ It’s simple, but 99 percent of people will not be able to execute it,” he said.

Save 15 per cent a year. The key to it all is starting early. For example, let’s say your annual salary is $50,000 and you contribute 15 percent each year to a retirement savings plan, by the time you you’re 67, the balance will be $1.6 million, assuming a 5 per cent annualized return and yearly wage increases of 3 percent.

Bernstein suggests getting going—even if you can’t afford the full 15 percent right away—by age 25. Start much later, and you may have to put aside more of your salary every year in order to have a comfortable nest egg.

Choose three index funds. How should you invest the money You don’t have to be a stock-picking guru in order to build wealth, Bernstein says. A simple portfolio made up of three low-cost index funds—a total stock market fund, an international total stock market fund and a bond fund—will suffice.

Keep spending in check. Once you’re saving regularly and investing in a simple but diversified portfolio, the next thing to do is to make sure you stick with the plan.

One of the biggest hurdles is overspending, Bernstein says. Small expenses, such as a cable TV package or coffee, can easily chip away at your savings goal, especially when you’re on a tight budget. So pay yourself first and use payroll deduction, so you don’t miss it.

Think long term. It’s human nature to react to immediate risks, Bernstein says. It’s hard for us to take the long-term perspective that financial markets require. As such, we have to learn to tune out the daily noise (i.e., what you hear in the news) and accept the fact that you will lose money in the market sometimes.

But those losses usually don’t last. Studying a little financial history, another one of Bernstein’s suggestions for staying on track, will help you realize that.

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